Mortgage rates probing new lows

Mortgage rates hit record lows for a second week in a row as investors — including banks — continue to see mortgage-backed securities that fund most mortgage loans as a hedge against economic uncertainty.

The Federal Reserve reports that banks are more reluctant to originate mortgages to borrowers with flawed credit than they were in 2006, but are nevertheless stepping up their purchases of loans that have been packaged into mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac.

Rates on 30-year fixed-rate mortgages averaged 3.83 percent with an average 0.7 point for the week ending May 10, down from 3.84 percent last week and 4.63 percent a year ago, Freddie Mac said in releasing the results of its weekly Primary Mortgage Market Survey. That’s a new low in Freddie Mac records dating to 1971.

For 15-year fixed-rate mortgages, rates averaged 3.05 percent with an average 0.7 point, down from 3.07 percent last week and 3.82 percent a year ago. That’s a new low in records dating to 1991.

Rates on five-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) loans averaged 2.81 percent with an average 0.5 point, down from 2.85 percent last week and 3.41 percent a year ago. Rates on five-year ARMs hit an all-time low in records dating to 2005 of 2.78 percent during the week ending April 19.

For one-year Treasury-indexed ARMs, rates averaged 2.73 percent with an average 0.5 point, up from 2.7 percent last week and 3.11 percent a year ago.

Although mortgage rates are down nearly a full percentage point from a year ago, applications are at about the same level, according to a separate survey by the Mortgage Bankers Association.

Demand for purchase mortgages during the week ending May 4 was up a seasonally adjusted 3.4 percent from the week before, but was down 0.4 percent from a year ago, the MBA said in releasing its Weekly Mortgage Applications Survey.

While a return to "pre-crisis lending standards" for home loans "wouldn’t be appropriate," Bernanke said current standards "may be limiting or preventing lending to many creditworthy borrowers."

A recent Fed survey showed banks are less willing to originate loans that meet Fannie Mae and Freddie Mac’s minimum credit scores than they were in 2006 — in some cases, even when borrowers make 20 percent down payments. The reason, Bernanke said, is the risk that Fannie and Freddie will make them buy back defaulted loans if the underwriting or documentation is judged deficient.

In a Jan. 4 white paper, the Federal Reserve outlined what it sees as "extraordinary problems plaguing the housing market," including an excess supply of vacant homes, tight mortgage credit, and the costs of an "unwieldy and inefficient" foreclosure process.

"The significant tightening in household access to mortgage credit likely reflects not only a correction of the unsound underwriting practices that emerged over the past decade, but also a more substantial shift in lenders’ and (Fannie Mae and Freddie Mac’s) willingness to bear risk," the white paper warned.

Ironically, Bernanke said today that banks are also stepping up their purchases of mortgage-backed securities, particularly those that are guaranteed by Fannie and Freddie.

"In this challenging time for housing markets, banks are attracted by the securities’ government guarantee," he said. Some larger banks "may be accumulating these securities in preparation for more-stringent liquidity regulations."

The Fed says banks’ purchases of MBS "have grown rapidly" in recent months. Increased demand for MBS pushes their prices up, and their yields down. So while banks are still keeping stringent underwriting standards in place, they are helping push mortgage rates for borrowers who can qualify down, by channeling more of their reserves into MBS.